The Bass Ackwards Economics of Bailout II

Wednesday, December 9, 2009

Ours is a consumer-driven economy. Everyone knows this, including our government, which is why it keeps extending unemployment benefits. Do everything you can to keep people spending, even while they’re unemployed and looking for work. It is the most, and possibly the only really effective thing the Obama Administration and Congress have done to prevent an already horrendous recession from being even worse.

The same logic should apply to the design of any bailout. If you want to generate jobs in a hurry, give every dollar you (the government) can spend to the people who need it most, whose propensity to spend it is the highest, preferably 100%. What you shouldn’t do is give it to business, large or small, hoping they will use the money to hire more people. That doesn’t work. Particularly during a recession, companies are reluctant to hire people unless they have a proven market for whatever product or service they sell. As for public works projects, they take forever and don’t hire nearly enough, fast enough – directly or indirectly – to lead a recovery. (Funding public works projects in a recession is all about politics, and is not good economic policy.)

In case you’re wondering, $1 billion dollars is enough to give 25,000 unemployed families an annual salary of $40,000. $100 billion would cover 2,500,000 families.

A negative income tax would then be used to encourage those families to find employment as soon as possible. What’s a “negative income tax”? It’s a tax that reduces, but does not eliminate the subsidy when the family begins to earn money. For example, if you give someone who’s unemployed a $1,000 subsidy which he loses if he gets a job paying $1,000, that’s a 100% tax, isn’t it, and he or she has no incentive to work If, on the other hand, he finds work that pays $1,000 and we let him keep, let’s say, half the subsidy, then he has $1,500, $500 more than before he went to work. If he earns $2,000, maybe we let him keep $250 of the subsidy, and so on until his family is financially viable and the subsidy has evaporated. It’s called a “negative income tax” because the person gets to keep more than 100% of what he earns, up to a point after which the usual (positive) income taxes take over.

But we can do better…

For one thing, instead of giving 2.5 million families $40,000 over 12 months, we can give 5 million families half as much over 6 months. This spreads the effect of the $100 billion we have to spend and gets our money into the economy twice as fast.

For another, we can focus the Bailout II funds in those communities in which the benefits of a sudden rush of consumer spending is likely to have the greatest impact on local and regional employment.

Third – and this is my personal favorite – instead of giving needy families money which they are free to use however they choose, including for reducing the debt instead of consumption, we can give them coupons. Coupons?!! That’s right. Give them coupons for the purchase of items that are sold retail and/or manufactured by industry segments that have been hardest hit by the recession and likely to hire the most and do it the quickest.

Am I God’s gift to recovery economics, or what? Seriously, President Obama is wasting our money trying to generate jobs by giving it to companies. It’s “supply side economics” in sheep’s clothing. He’s expecting companies to hire people now, because of tax and other incentives they’ll realize later, in the hope that consumers, including the newly employed, will buy what those new hires make. Supply creates demand. The economy doesn’t work that way. It’s a waste of time and money.

If you have time, you might also want to read, “The Supply Side Economics of President Obama,” published December 14 on the WordFeeder.


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